KARACHI, Oct 7: The cement sector, which accounts for Rs68 billion or five per cent of the market capitalization of Rs1495 billion at the Karachi Stock Exchange, has been at the limelight at the stock exchange since the beginning of the current bull run at the market.

But is the light on the cement stocks now beginning to fade out? Analysts do not still seem to be issuing a 'sell' note on the sector, but several have changed stance from 'positive' to 'neutral'.

Cement sector analyst, Ali Sibtain at Elixir Securities says that yearly sales trend indicates that going forward, total cement capacity utilization level for FY05 could settle at 85 per cent even if there is nominal or no growth in the remaining quarters of FY05.

However as a result of depressed margins from rising fuel costs, the analyst expected sector earnings to decline by 10 per cent in FY05 to Rs4.7 billion from Rs5.2 billion expected in FY04. "The sector will trade at a PE of 11.3x as opposed to 12.57x in FY04", he said.

In a cement sector report issued on Thursday, Abdul Rasheed, analyst at Invest Cap observed that demand-supply gap was slated to widen as 13 million tons of additional capacity comes on line during FY05.

Numerous mills had launched or were planning to go into expansion in their production capacities. Analyst estimated that by FY09, total cement sales would reach 19.6 million tons, resulting in a capacity utilization of 65 per cent as compared to 79 per cent in FY04.

"The average rise in cement sector profits in FY04 will continue in FY05 and FY06 also," predicts Rasheed, adding that profits would stabilize for the next two years, i.e. till FY08 due to mounting capacity. But analyst reckoned that things were not likely to go out of hand. The situation now was much different from the capacity expansion spree of the 90's (the 'lost decade' for the cement sector) which had thrown the cement sector into turmoil.

Compared to the 90s, there was currently a genuine demand growth due to healthy economy and export opportunities. Coal conversions and single-digit interest rates had made expansions feasible.

Commenting on the cement sales figures for 1QFY05, Elixir Securities stated that cement sales for the month of September had shown a 26 per cent year-on-year increase to 1.410 million tons per annum (mtpa).

That included a 21 per cent year-on-year increase in domestic sales to 1.254 mtpa and a 75 per cent increase year-on-year in export sales. Total sales for 1QFY04 had grown by 28 per cent year on year to 4.09mtpa.

"Yearly comparison of trends indicate that total utilization level for the industry can rise to 85 per cent translating into 14.5mtpa of sales for FY04," said the analyst.

Sector earnings were likely to stand suppressed to Rs4.7 billion in FY05 from Rs5.2 billion in FY04 due to declining margins. But for now cement off-take had continued to pickup on the back of infrastructure development.

Monthly sales in September had also shown improvement of 8 per cent month-on-month, through 9.1 per cent improvement in domestic sales and 0.6 per cent decline in export sales. "However next month we expect a decline in sales due to the onset of the month of Ramazan, when traditionally sales are seen to slacken", the analyst said.